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Marijuana legalization in Colorado brought about uncertainties after one year

It's been one year since Colorado's first recreational marijuana stores opened. Has the tax-and-regulate policy been successful or should the revenue shortfall and unknown social costs give policymakers and voters in other states cause to reconsider?
- photo by Deborah Sutton

More than a year has passed since Colorados Green Wednesday, when hundreds of people braved the New Year's Day cold to queue outside the states 24 marijuana retail stores.

Colorado became the first jurisdiction in the world to legalize marijuana for commercial production and sale. Washington state followed six months later and Oregon and Alaska are expected to open retail shops in 2016. Other states like California, Massachusetts, Nevada and Maine, where medical marijuana and small amounts of recreational pot are legal, are expected to pass measures in next year's elections that broaden those allowances.

Meanwhile, policymakers and advocates on both sides of the legalization debate are watching closely to see if what Colorado's governor called the greatest social experiment of the century is worth the fiscal and social risk.

With one year past, it's too soon for policymakers and health experts to draw reliable conclusions on the costs versus benefits of marijuana legalization. Tax revenues from legal sales were $86 million less than projected and the social costs on public health and safety remain largely unknown. Despite the uncertainty, state officials and policy analysts don't anticipate the setbacks and numerous unknowns of Colorado's experiment to deter the spread of legalization to other states.

Oregon and Alaska voted to set up commercial markets for marijuana, but the voters in Washington, D.C., passed an initiative just to allow home production. They didn't vote for a tax and regulatory system, said Beau Kilmer, co-director of the RAND Corp's Drug Policy Research Center. If you're a jurisdiction wanting to do something else other than prohibiting marijuana, turns out you have a lot of options.

Revenue realities

The option Colorado voters approved to license the manufacturing, cultivation and commercial sale of marijuana was revolutionary compared to policies legalizing pot in other countries.

For example, the Netherlands' policy doesn't allow marijuana stores" like Colorado and Washington. Instead, limited amounts of cannabis are sold per person in select, 18-and-over coffee shops. Production, possession and selling of marijuana is still illegal, but they have a policy of not enforcing the law against small-scale transactions, Kilmer said.

Advocates for legalizing marijuana in the United States are framing their campaign as a responsible fiscal policy, where the sale of pot will generate tax revenue that will cover the costs of regulation and then some.

If marijuana was legal in the U.S., taxpayers would save $7.7 billion in combined state and federal (enforcement) spending, while taxation (of sales) would yield up to $6.2 billion a year in new revenues for the federal and state governments, according to the pro-legalization blog Why Legalize Marijuana?, citing a 2005 Harvard study by economist Jeffrey Miron.

The appeal of more funding for schools, stronger local governments, better social programs and perhaps, in the long-run, lower taxes likely drew many Colorado voters to the polls in 2012 to pass Amendment 64 with 55 percent voting in favor, 45 percent opposed.

Gov. John Hickenlooper's early revenue projections in February 2014 estimated that medical and retail marijuana sales combined would reap $134 million in tax revenue for the fiscal year beginning July 2014 and ending June 2015. The sale of retail marijuana alone would generate $118 million in tax revenue.

Hickenlooper's revenue forecast was more optimistic than the Colorado Legislature's $67 million projection for retail sales.

Whats the reality? The 2014-15 fiscal year is half over and the most recent projection for retail marijuana tax receipts is expected to total $36.2 million. The outlook for medical and retail sales combined is $47.7 million by the end of the fiscal year.

Its important to keep in mind that no one has ever created a legalized recreational market to the degree that we have, Skyler McKinley, the state's deputy director of marijuana policy, said explaining the potential $86 million discrepancy. We didnt know what use patterns would be like, how people would buy marijuana, how much they would buy, and so on and so forth.

For example, many people expected the black market to disappear with legalization, but it continues to thrive. During the first few months of legalization, the state was losing revenue to the illegal market where street prices were a fraction of store prices, which include a 15 percent excise tax, a 10 percent special state tax, a 2.9 percent state sales tax and a variable local sales tax, said Katharine Neill, Glassell postdoctoral fellow on drug policy at Rice University's Baker Institute.

Some news agencies reported that retail stores sold pot for up to $450 an ounce during the first half of 2014, while the black market prices were anywhere between $160-300, according to the crowd sourcing website Price of Weed.

Another surprise to state budgeters was an unexpected rise in medical marijuana sales. State officials anticipated that some current medical marijuana users would switch over to the legal recreational market to avoid the inconvenience of state registration. But the lone 2.9 percent sales tax on medical marijuana proved a powerful incentive for marijuana newcomers to buy the one-time medical card for as low as $20 and avoid the higher priced recreational marijuana.

Weve had people who said that they walked into a dispensary and the owner said, Look its a lot cheaper to buy medical (marijuana). Go around the corner, get a red card, and then come back and buy medical, said Diane Carlson, director of Smart Colorado, a Colorado-based interest group focused on protecting youths from marijuana.

But Neill and other observers have already seen store prices drop to closely match street prices as more legal growers and sellers entered the market throughout the year.

To create one of these systems, it actually takes resources. To begin regulating it will take resources, so early on you're going to have to put resources into it, said Kilmer. But then you expect over time that the tax revenue will be enough to overcome that.

Implications of less money

With reduced tax revenue, the state has had to scale back funding programs Hickenlooper proposed in his 2014-15 budget. He proposed $111 million for a youth marijuana use prevention program, a substance abuse treatment system, regulatory oversight, law enforcement and public safety, public health and statewide coordination.

And that $111 million total didn't include another $40 million earmarked toward a school construction fund, dubbed Building Excellent Schools Today or BEST.

Our (new) budget request reflects the lower projections, McKinley said. Were currently operating off of a $33 million figure. We didnt (have to) cut anything (since) no money was allocated by the time we realized that the projections were going to be lower.

Right now, all revenue from the 15 percent excise tax goes toward the school construction fund. Once the fund hits $40 million, however, excise tax revenue will be designated to the general marijuana fund to support regulation and public programs.

McKinley said the state never intended marijuana sales to generate surpluses that would spill over into other state programs, despite assurances by advocates and voters' expectations.

Weve always believed that marijuana should pay its own way, said McKinley. We didnt legalize for the tax money. Our philosophy in Colorado is that the revenue that were bringing in from the sale of marijuana is going to be completely allocated to any costs related to legalization.

Public safety

Time will tell how reducing the scale of the proposed youth prevention, public health and safety and substance abuse programs will affect the social costs of legalization.

On the expenses side of the ledger, a 2010 Harvard study estimated that Colorado was spending an estimated $145 million every year enforcing its marijuana laws and that legalization would save the state a large portion of those costs.

However, that assumption is difficult to prove.

The state cannot easily track law enforcement spending since municipalities and other local entities do the lion's share of law enforcement legwork and we don't exercise any control over their budgets, McKinley said.

There have been no unusual budget increases or decreases for the statewide departments of public safety, public health and environment or corrections since legalization. For example, the department of corrections increased its budget by more than $70 million since 2013, but the bump in spending isn't unusual and is "reflective of general increases in operational costs," like cost of living, said Adrienne Jacobson, public information officer for the Colorado Department of Corrections. "Any budget increases are in no way related to the legalization of marijuana."

And while the state doesn't have access to local budgets, officials assume that with pot seizures down the related county expenses have also declined. In 2012, there were 12,471 marijuana seizures reported by local law enforcement agencies to the Colorado Bureau of Investigation, said McKinley. In 2013, there were 5,828 seizures. Through Dec. 2, 2014, there were 4,387 seizures.

And so far there hasnt been a major spike in other crimes that would undermine the apparent savings from marijuana decriminalization. The statewide crime report for 2014 doesnt come out until mid-2015, but Denvers annual crime report indicates that overall reported crime rose 2.5 percent in 2014, a smaller increase from the previous year of a 7.4 percent rise.

The uncertainties surrounding legalizing pot haven't slowed growth in Colorado's marijuana market. As of December, 308 medical and recreational stores and some 400 cultivation facilities have launched in Denver alone, according to Gina Carbone of Smart Colorado.

The rising competition has brought commercial prices down and increased sales, which bodes well for state coffers.

But the social costs of legalization will remain largely unknown for several years, at least.

In October, Hickenloopers office released a 74-page data gap report on the unknown effects to the health and safety of underage youths, traffic accidents, criminal activity, the environment, violence and gun use, hospitalization and death. The report also lays out a strategy to collect and analyze new data as it rolls in.

Smart Colorado is most concerned about how legalization will lower perceptions of harm among youths and impact underage use, health and school performance. We've opened up a Pandora's Box and it will take years to analyze the impacts to society, Carlson said.

But there have been studies that estimate that the social costs of marijuana, while concerning, are less than the costs of alcohol, Neill asserts.

Both Neill and Kilmer agree that if heavy drinkers, hard drug users and prescription drug abusers switched to using just marijuana, society would benefit. But they also agree if those people combined alcohol, hard drugs or prescription drugs with marijuana, problems related to substance abuse would increase.

The numerous unknowns in Colorado are unlikely to prevent other states from following suit albeit perhaps with a different model.

Besides Colorado's for-profit commercial model, states could limit production and sales to nonprofits. They could allow home production only, follow a Netherlands-type policy or they could have a state monopoly where the government is in charge of production and distribution, similar to alcohol regulation in states like Utah, Kilmer explained.

It turns out that the research on this monopoly model, at least for alcohol, is much better for public health than a commercial system where you deregulate and turn it over to the private market, he said. In the coming years, it will be really interesting to see what happens in other states. Are people only going to focus on the for-profit alcohol model or are they going to consider these middle ground options?